Why CFOs Mistrust Human Resources, and how Human Capital Financial Statements Will Help.

I have learned a few basic truths about CFOs. They like efficiency and accountability, dislike making snap decisions, and are always looking for a better forecasting model. They also appear to prefer cars with good gas mileage.

For some of these same reasons, they generally mistrust the metrics offered by Human Resources about the state of the organization’s human assets. This may soon change, based on the first draft of a comprehensive Human Capital Financial Statement that was recently printed in CFO magazine.

While the ink is still wet on the draft, the impact is starting to ripple through both the HR and Financial camps. You can read the draft here – http://tinyurl.com/6vs9jx9. If you click on the link, pay careful attention to the small link to the spreadsheet model on page 2. If you miss it, you can jump to it here – http://tinyurl.com/6sv9msa. Examining the data categories on the spreadsheet will give you a fast snapshot of the work that has been done.

This is big. Finance has long been frustrated by “soft” HR metrics, with little thought going in to the alignment of what is measured to the core mission of the organization. Worse yet, key decisions may be driven by bad data, with bad results. The wrong type of people keep getting hired, or wellness programs are launched that do not change behaviors in a meaningful way. By agreeing to a more “forward looking” set of metrics that are measuring reliable predictors, better feedback loops can support better decisions.

Simply put, having a functional Human Capital Financial Statement can become a significant competitive advantage. I understand that financial statements by nature are backward-looking, and this work is trying to offer data that anticipates (and plans for) risks. While this is not a finished work, I am pleased that the conversation is finally beginning about what “dials” should be on the “dashboard”.

Let me give a couple of examples that might help clarify the importance of getting the numbers right. Many traditional metrics for HR are well accepted, but may not be that useful. For example, it is often thought that measuring the rate of employee turnover is a high quality metric, as it is easy to calculate and common sense says that lower turnover is better. Not so fast.

Most organizations do not track the data needed to show the turnover of high performers vs. low performers. You WANT a high turnover rate on the low performers, right? This means you must align the performance management system with the turnover data. More advanced organizations are starting to link low turnover rates of high performers to higher bonuses of individual managers and supervisors. Behavior rewarded is behavior repeated.

Taking the example further, in the Human Capital Financial Statement, there is a “High Performing Employee Differential” that enumerates the impact high performers have on an organization. If the performance management system is measuring the number and quality of high performance employees, then the metric can reliably appear on the dashboard. Is the wellness program paying off by helping motivate high performance? Clearly, the accuracy of the metric comes down to the quality of the data. It’s all connected.

I have often been puzzled by the willingness of HR departments to stick with meaningless metrics for decades. Measuring the speed of hiring, rather than the quality of the new hires. Measuring the turnover rate, not the quality of what is leaving. Measuring the head count, not the productivity. Measuring participation, not behavior change. And so on.

The Human Capital Asset Statement allows organizations the ability to look at human capital as a value producing factor; not just a cost. Trending the value contribution of the workforce during 2009, a difficult year, would have given great insight into the jobs and facilities that were adding value. You may know about the importance of critical high visibility roles, but be blind to the impact of hidden factors that impact client retention and profitability. In a good Human Capital Financial Statement, these should be measured and brought to light.

This is exactly where we are starting to head in this brave, new world of better metrics. My final point is the significant impact this will eventually have on equity markets and investments. Organizations frequently state that employees are their most valuable asset, yet publicly traded organizations provide little information on this “most valuable asset” to investors or the public. The Securities and Exchange Commission requires extensive disclosure regarding all major assets including financial, physical, and technological/intellectual property. However, they do not require disclosure of what is, for most organizations, their largest annual operating expense. Human capital and talent management are differentiators of success and sources of competitive advantage.

In a future world, human capital will finally be reported as a part of public financial statements. This will be big.

I work in HR, and we HR Professionals have known that talent management and wellness is important for quite some time. We have worked hard to get our recruiting, learning, total compensation, performance management, engagement, and other practices in order over the past decade.

With Human Capital Financial Statements, I hope we finally see a payoff.

Advertisement

Read Full Post »

Now it’s getting interesting – Compensation is big. Who knew?

Wow.   Pay for performance policy?  Restricting the pay of big shots?  Is there an Easter Bunny?

In the 2 years I worked inside a nation compensation and benefits consulting firm, I never thought that compensation policy was interesting.  Right up there with watching paint dry.  I thought that accountants with big brains set some secret algorithm and the magic box would just whir and paychecks would emerge.  At least that was my impression.

Now, compensation is big.  Really big.

It all comes down to $$$

Proof came in several forms.  Over the weekend, did you see the protests at the Chicago American Bankers Association conference?  If not, check out the link here.  Democracy can be messy, but it works, mostly.

On the Washington front, pundits are saying that one of the biggest things that Obama has done so far is step in and cap the compensation of the larger TARP-related banks.  But it isn’t simple.  One critic of the plan said the news of the decision may undermine a program that Obama traveled to Landover, Md., to announce on the same day. Obama went to the headquarters of a small company to tout his proposal to let small banks into the TARP program, as a part of the effort to get small business lending going again.

Camden Fine, president of the Independent Community Bankers of America who attended the event with Obama, says the pay master’s decision could doom the idea, as community bankers will be loath to take TARP funds if they think Feinberg will set their pay.

Want a good article on the subject?  Here tiz.

So, what does this mean?  It means that awareness about what people are paid for the work that they do is back on the front burner, and that is probably a good thing.  It also means that compensation theory experts are going to have their moment in the sun.  Whee.

Read Full Post »

A rant about performance management from HRPDA

So, we hire poorly, screen poorly and then are surprised when the last line of defense – performance management – fails?

I spent quite a bit of time at SHRM National listening to the full range of topics, all themed on improving productivity and getting the “HR Thing” right.  Much of it was spent on the administrative side of our world.  Why?  Because it is safe, and it is what we see as the “bedrock” of our world.

It’s wrong.  We should be looking at a better bedrock.  We should be spending our time evenly split on workforce planning and helping guide the organization to a higher level of performance and profitability, and management development, helping guide the individuals inside the organization to higher levels of personal performance.

I’m writing this during the monthly meeting of the Human Resource Professional Development Association.  Elizabeth Stahl is presenting, and she gets this point.  She is pushing people to have courage, take risks, and gain influence.  All of which is true, especially as my data shows that we in HR have a very slow decision cycle and are cautious, and want to protect our paychecks. It is also clear that for this group of mostly senior HR people that we, as a group, think higher levels of risk taking is a good idea…within reason.

Within reason?  Hey, we’re in a “seige mentality”.  We’re under attack, and everyone is hunkered down, protecting their paycheck.  This is a lousy time to take risks.  At the same time, our organizations MUST take risks to survive.  Our CEOs need to have us taking good risks, and helping the organization survive.

Maslow got it right.  First we are focused on survival, then on safety, then on community.

Focus on survival.  Take some appropriate risks.  And accept that these are mutually exclusive.

Read Full Post »

Fact: Performance Management is broken

One of my takeaways from the conference – everyone is mad at performance management.  Managers hate doing it.  HR hates administering it.  CFOs hate having a huge asset (people) with no real feedback loops or accountability system.

I have an idea.

Instead of using software to automate a flawed system, use new communication channels (social networking, perhaps?) to build a fast feedback system that is more direct, and get a better result with less hassle.  I’ll be meeting with some social networking wonks and geeks next week, and I will be pushing this idea on them.  They don’t have an HR background, and that may actually be an advantage.  This is a marketing and communication and system design problem, more than an HR issue.  It’s just an issue that we all need to fix.

Now more than ever.  I’ll keep you posted.

Read Full Post »

General Session – John Kotter was good!

Coming off as a kind of cranky, rumpled professor, John Kotter presented a general session that looked at economics and our nation’s sense of urgency.  Acutally, he is a cranky, rumpled professor at Harvard Business School.  Details to follow – but the big deal to me was that he didn’t use Powerpoint – he was using overhead projector technology and I found it very refreshing.

Read Full Post »

A clever idea about performance management

Just had a chat with a very frustrated head of HR from a social service agency.  She was on the trade show floor shopping for performance management software.

I challenged her that when she installed the online system, that the managers would hate it at the same as they hate the paper based one, only at a faster rate.  They would be ignoring her at the speed of light, not the speed of paper.

The answer?  Use the guise of the economic crisis to redesign the system using a “clean sheet of paper” approach, both eliminating waste and respecting her people.  Simply put, make it better and stop the madness.

She is going to call a meeting with her managers, and redraft the system using social networking tools as the engine of communication, and get away from annual reviews.  Faster, simpler, better.  I’ll keep you posted.

Read Full Post »